AIG June 2013 Update

Our investment thesis remains on track. AIG is relying more on operation improvements and continues to make progress. Publication of the capital liquidity and restrictions under designation as a systemically important financial institution SIFI is expected soon and should eliminate a remaining uncertainty. After SIFI requirements are defined, it is anticipated management will be able to initiate capital allocation plans starting with a dividend payment followed by share repurchases “over time.”

The company remains a good value; trading at about $45/share or a 30% discount to our current intrinsic value estimate of about $66/share.

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Deutsche Bank Investor Conference: Speaking at the conference on June 4, 2013, CEO Robert Benmosche opened by welcoming recent news coverage on AIG for providing him discussion material. Somehow it’s hard to imagine this colorful figure without anything to say. His comments on specific topics are included in part below. The full recording (about 40 minutes) is available here: [Source].

AIG Designated a Systemically Important Financial Institution: American International Group announced on June 3, 2013 [Source] that it received notice from the U.S. Treasury that the Financial Stability Oversight Council proposed that AIG is a systemically important financial institution (SIFI) under the Dodd-Frank Wall Street Reform and Consumer Protection Act. No surprise here; AIG’s near collapse and inability at the time to provide needed collateral for Goldman Sachs commitments, among other issues, almost brought the bank down with them.

Although AIG can appeal the designation that seems unlikely. During the Deutshe Bank conference Robert Benmosche commented the new federal oversight will “put a discipline on AIG that we’re not used to.” Classification as a SIFI will subject AIG to regulations on capital and solvency that are yet to be announced. The company is building its liquidity in anticipation of the regulation and seems to be in good position. When announced, AIG should benefit as the uncertainty over the impact of regulations are eliminated. Some anticipate a benefit of the SIFI designation will be a reduction in AIG’s funding costs because of the implied guaranty of the Federal Government.

Robert Benmosche also said regulators need to be uniform in their methodology in determining SIFI and that Warren Buffett‘s Berkshire Hathaway has avoided the designation so far. “I worry about some people that have been left out…they do seem to be a financial institution.”

Not sure if Benmosche is upset because Berkshire Hathaway hired four AIG’s executives in late April or if he forgot that Berkshire Hathaway was a source of cash to help financially strapped companies like General Electric, Goldman Sachs and Bank of America who needed cash during the financial crises; just as the federal government was a source of cash for AIG. Is AIG suggesting the Berkshire who provided aid should be regulated for the deeds of the previously irresponsible AIG who needed the aid? I’m a big fan of Mr. Benmosche but he should continue to focus on improving results at AIG rather than wishing regulations on Berkshire Hathaway in the capable hands of Warren Buffett and Charlie Munger.

International Lease Finance Corporation (ILFC) Sale: On June 5, 2013 AIG was advised by the Escrow Agent that it had received the required deposit for the sale of ILFC [Source]. AIG previously announced the pending sale of ILFC, its non-core aircraft leasing subsidiary, to a Chinese consortium. The sale will further streamline AIG to focus on core insurance business and reduce debt. In the previous week, the buyers missed the May 31, 2013 deadline for the deposit and gave AIG the option to cancel the sale if it chose. This led to a flurry of speculation about the potential cancellation of the sale and its impact on AIG.

So the receipt of the deposit was welcome news. During the Deutsche Bank conference Robert Benmosche described the deal as “a complicated” transaction involving a complicated business and two complicated governments but that it was still scheduled to close by June 14.

If for some reason the ILFC sale was terminated, it would only be a temporary setback. AIG could look for another buyer or spin it off when market conditions warrant. In any event ILFC is not in AIG’s future and they took a write down on it and placed it in discontinued operations. The book value is now about $4.6 billion; a sale delay would have no impact on our intrinsic value estimate and a cancellation would not be material. However, it would be nice though to close this chapter of the company’s restructuring, further reduce debt and provide cash for better deployment like dividends, share re-purchases, or higher return opportunities in core businesses. Benmosche continually indicates he prefers initiating a dividend first followed by share repurchases.

American International Group Prevails Against Bank of America Corp: On May 6, 2013 a U.S. District Judge in Los Angeles ruled AIG could proceed in a law suit against Bank of America over residential mortgage backed securities purchased from the bank’s Countrywide Financial unit [Source]. AIG sued Bank of America and Countrywide for $10 billion in damages in 2011 over misleading underwriting guidelines. The Judge ruled that AIG can pursue claims of fraudulent inducement and subsequent hearings currently underway in New York appear to be developing favorably for AIG and others against Bank of America. These cases have a long way to go but may provide a favorable addition to our intrinsic value estimate of AIG.

AIG Announces further Debt Reduction: On June 4, 2013 American International Group announced [Source] that it will redeem all of its $750,000,000 aggregate principal amount of Debentures outstanding (6.45% Series A-4 Junior) on June 17, 2013.

AIG in JV Agreement with PICC Life to Form Distribution Company in China: On May 29, 2013 American International Group and People’s Insurance Company (Group) of China (PICC) announced [Source] they have entered into a joint venture agreement to form an agency distribution company in China. This follows AIG’s $500 million December 2012 cornerstone investment in the PICC initial public offering. PICC Life and AIG agreed to form this joint venture agency distribution company selling life and retirement insurance, property and casualty products, as well as other products aimed at meeting the needs of this developing market. AIG will own 24.9% of the distribution company, with PICC Life holding the remaining 75.1%. Board seats as well as management assignments will be based upon share holdings.

“We are delighted to enter into this joint venture with PICC Life to provide Chinese consumers life insurance and other financial products to enhance and protect their overall quality of life,” said Robert H. Benmosche, President and Chief Executive Officer of AIG. “This partnership builds on the longstanding relationship and history of cooperation between PICC and AIG to develop strategic business expansion opportunities. We are excited that our joint venture with PICC Life provides AIG with a unique opportunity to enter the Chinese life market with a well-established and respected local partner.”

Disclosure: Long AIG, AIG Warrants, BRK




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